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Where Goes Gold?

Gold ETPs have fallen out of favor, and prices are falling as investors sell at the fastest pace since the product debuted a decade ago.

Investors are dumping gold-backed exchange-traded products (ETPs) at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years.

Holdings in the 14 biggest ETPs plunged 31 percent to 1,813.3 metric tons since the start of January, the first annual decrease since the funds started trading in 2003, data compiled by Bloomberg show. The removals erased $69.7 billion in the value of the assets as prices fell by the most since 1981. A further 311 tons will be withdrawn next year, according to the median of 11 analyst estimates compiled by Bloomberg.

ETP investments reached a record $148 billion last year, helping sustain the bull market that drove a more than sixfold increase in prices since 2001 by offering a way to own bullion without needing to store it. The slump shows some investors losing faith in gold as a preserver of wealth after inflation failed to accelerate and the Federal Reserve signaled it may curb stimulus. John Paulson, the biggest investor in the largest ETP, said last month he doesn’t plan to buy more.

“All the bullish factors we had pushing gold higher in the last 12 years are now going into reverse,” said Robin Bhar, a London-based analyst at Societe Generale SA who’s ranked by Bloomberg as the most-accurate precious-metals forecaster over the past eight quarters. “There will be more ETF selling in 2014 as the price goes lower.”

Gold for immediate delivery fell into a bear market, defined as a drop of 20 percent or more, in April and traded at $1,251.24 an ounce today, down 35 percent from the September 2011 record of $1,921.15. Only corn and silver fell more this year among the 24 commodities tracked by the Standard & Poor’s GSCI gauge, which slipped 2.7 percent. The MSCI All-Country World Index advanced 16 percent, and the Bloomberg Treasury Bond Index lost 2.8 percent.

Goldman Sachs Group Inc. called bullion a “slam-dunk” sell in October and said it was among the bank’s most bearish commodity forecasts for next year. Bullion may average $1,216 in 2014, the least since 2009, according to the median of 14 analyst forecasts compiled by Bloomberg. Hedge funds and other large speculators were the least-bullish since June 2007 in the week to Dec. 3, Commodity Futures Trading Commission data show.

ETP sales of more than 800 tons since the start of January, including by billionaire George Soros, exceeded total purchases in the previous three years. Paulson & Co. cut its holdings in the SPDR Gold Trust, the biggest ETP, by half in the second quarter, while Soros and Third Point LLC’s Daniel Loeb sold their entire stakes.

Inflation Hedge

Investors see less need for “disaster insurance,” Fed Chairman Ben S. Bernanke told U.S. lawmakers on July 18. Traditionally, investors turn to gold in times of turmoil as an alternative store of wealth to equities and the dollar and as an inflation hedge. Until 2003, most held gold bars, coins, or jewelry in vaults or bought futures and options.

The introduction of gold-backed ETPs, which trade like equities, gave access to the metal without the need for arranging storage or dealing in derivatives. One futures contract traded on the Comex bourse in New York, equal to 100 ounces, costs $124,940 while a share in the SPDR Gold Trust, representing 0.1 ounce, is valued at $120.56.

ETPs backed by gold were created by Graham Tuckwell, a Canberra, Australia-born entrepreneur who persuaded the producer-funded World Gold Council to back the proposal after the Australian Gold Council rejected his plan in 2002. The products are cheaper and more transparent than mutual funds, Tuckwell said in an interview with Bloomberg News last year.

“Gold ETPs are preferred by a lot of people because at the end of the day it’s easier to trade and easier to manage your portfolio,” said Francisco Blanch, the head of commodities research at Bank of America Corp. in New York. “And it’s probably cheaper. If you buy physical bars, you have the cost of the bar, but you also may have to pay for storage of the physical bar. The ETP does all of that for you.”

Asian Jewelry

In Asia, where many buy jewelry as a form of investment, the cost to consumers is higher. At a store of SK Jewellery Pte Ltd. in central Singapore, a gram of 99.9 percent purity, cost S$62.50 ($50) on Dec. 11. That’s equivalent to about $1,555 an ounce, 24 percent more than the London spot price that day. A 1-ounce coin at United Overseas Bank Ltd., Southeast Asia’s third-largest lender, was on sale for S$1,640 an ounce ($1,310) the same day, according to its website.

Some of the economic conditions that prompted investors to buy gold over the past few years no longer exist. The U.S. unemployment rate, which touched a 26-year high of 10 percent in October 2009 after a recession in the world’s largest economy, dropped last month to a five-year low of 7 percent, the government reported Dec. 6. The U.S. economy grew at an annual rate of 3.6 percent in the third quarter, the strongest in 18 months. Inflation in the U.S. is running at a 1 percent annual rate, half the pace of the past decade.

“Inflationary pressures are not strong,” said Peter Richardson, the Melbourne-based chief metals economist at Morgan Stanley. “We’re certainly not buyers” of gold, he said.

The Standard & Poor’s 500 Index rose 25 percent this year, heading for the biggest annual gain since 2003. The SPDR S&P 500 ETF Trust is now valued at $165.4 billion, compared with $33 billion for the SPDR Gold Trust.

“Equities continue to be the only game in town,” said Jeff Sica, who helps oversee more than $1 billion of assets as president of Sica Wealth Management in Morristown, New Jersey. “Why would you want to hold gold and see the value depreciate when you can buy equities and see your money grow?”

Lower prices are attracting some buyers and may boost ETP holdings in 2014, said Nick Moore, a London-based managing director and commodity strategist at BlackRock. He declined to provide a forecast.

Peter Sorrentino, who helps manage about $14.8 billion at Huntington Asset Advisors in Cincinnati, said 5 percent of its natural resources fund was allocated to gold and he wants to double that, citing prospects for faster inflation, limited supply, and strengthening demand in Asia.

“At some juncture, all the money-printing will come home to roost, and at that point the value of currencies will drop,” Sorrentino said. “Lots of metal has been migrating from west to the east.”

Smaller Bars

Consumption in China, poised to overtake India as the biggest buyer this year, may increase 29 percent to 1,000 tons in 2013, the WGC estimates. Gold in Europe is being refined from larger bars suitable for local users into smaller sizes favored in Asia, while Deutsche Bank AG and UBS AG are among banks that opened vaults to store metal in the region this year.

Bullion demand in Asia will keep rising as inflation speeds up, HSBC Holdings Plc economists including Frederic Neumann said in a report Oct. 18. Asia and the Middle East accounted for 68 percent of demand in the 12 months to September compared with 8.3 percent for Europe, data compiled by Bloomberg show.

The pace of ETP outflows has slowed to about 40.7 tons a month on average since June, compared with 97.7 tons a month in the first half, according to data compiled by Bloomberg. Holdings fell 28.6 tons this month. The amount held in ETPs reached a record 2,632.52 tons on Dec. 20 last year.

“Most of the ‘weak hands’ are already out of the market,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “We may see inflows with price stabilization expected from the second quarter of 2014.”

Mine output may also drop. The world’s biggest producers including Toronto-based Barrick Gold Corp. took at least $26 billion of writedowns, cut spending, and fired workers as prices fell and costs rose. UBS estimates miners spend about $1,200 to produce every ounce.

Paulson, the hedge-fund manager who said last year gold was his best long-term bet, told clients last month that he personally wouldn’t invest more money in his gold fund because it’s not clear when inflation will accelerate, according to a person familiar with the matter.

While Paulson & Co. sold half its stake in the SPDR Gold Trust in the second quarter, the investor remains the largest holder, with 10.23 million shares as of Sept. 30, a Securities and Exchange Commission filing shows.

‘Ultimate Bubble’

Soros, who called gold the “ultimate bubble” in 2010, increased his stake in the SPDR Gold Trust over five quarters starting from the three months through the end of September 2011. His company then lowered holdings in the two quarters through March, before selling the remainder in the three months to June, SEC filings show.

“Gold ETFs have fallen out of favor in 2013,” said Mike McGlone, the New York-based director of research at ETF Securities, citing the economic expansion, rising equity markets and prospects for tapering by the Fed. “We view 2013 as a correction in the longer-term structural gold bull market.”

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